Business File – Pasok’s Pasionaria

In an exclusive interview with George Gilson, senior Pasok MP and former minister Louka Katseli tells Business File what went wrong, her party’s policies, and what has to be done now that the country has an interim unity government

If someone can be said to have retained a semblance of the social voice of Pasok in the time of the EU-IMF-ECB memorandum, it is Louka Katseli. At the development ministry she fought hard against pressures from the banks and to pass a bill to reschedule the loans of overly indebted households. As labour minister, she defied troika pressures and extended sectoral labour contacts. Most recently, she was expelled briefly from Pasok’s parliamentary group, because she voted down a single clause deregulating labour relations, only to be brought back into the fold by George Papandreou after she gave his government its last vote of confidence.

As Pasok struggles to re-invent itself, Katseli has tabled proposals to inject some “progressive” policies into the economic straight jacket of the memorandum. Some even believe she may make a leadership bid when Papandreou steps down, something she refuses to confirm or deny. In the interview that follows, Katseli defends the Papandreou government’s policies before the memorandum, derides the failure to overhaul the tax system and restructure public administration, and outlines the challenges faced by the interim coalition government.

You have known both George Papandreou and Antonis Samaras for many years. How would you compare their characters?

They share some common traits. They were raised in families involved in public affairs. They are both cosmopolitan and well-educated, and they both entered politics very early, without having independent professions before their entry into politics. Their management capacity is tested through politics, which is a very different ballgame, compared to a private firm. They have different personalities. I think George is more of a social liberal than Antonis. They both have a problem with making hard decisions.

You were in the Papandreou government from the beginning. What went wrong?

Three things went wrong. The government was not prepared to face an unprecedented financial crisis. This is a fact. It hit everyone by surprise by mid-January 2010, and the whole system was not prepared to deal with it.

What went wrong then? After what happened, no serious, strong negotiating team was formed and there was no time or capacity to map and implement a medium-term strategy.

When you came in, you quickly found the real deficit numbers and announced them. Normally, the first thing one does is to take radical measures to reverse the current. You didn’t do that for months. Can’t one argue that this is at best criminal negligence?

That’s not the story. The whole programme we had set up was based on the expectation that the deficit was around ten per cent. The government had announced two weeks prior to the election that it was 6.5 per cent. We expected it to be about 10 and it turned out to be 12.5 per cent. So there was no major surprise on the fiscal deficit.

The whole Pasok programme beforehand was based on the need to tackle three challenges since we had a triple crisis on our hands: a larger fiscal deficit than announced, a serious competitiveness problem, and a debt problem.

What we presented before and immediately after the election – including the first budget and the Growth and Stability Program presented to the Commission in January, 2010 – aimed to bring the budget deficit down to reasonable numbers within a four-year period.

Didn’t the numbers you found justify an immediate revision of the initial programme?

No. It justified implementing our programme. A one or two percentage point difference in the deficit does not require a change in the policy mix or the focus of the program. It required curtailing expenditures and promoting a major reorganisation of the tax system to expand returns. It did not require cutting wages and pensions, because we thought then and I continue to think that these are ineffective fiscal measures, but rather freezing them. The first budget did exactly that. It curtailed and restructured expenditures and increased taxes. The cliché that people use is wrong – that the budget deficit was the principle problem.

The programme changed in January not because the budget deficit was different than what we originally thought, but because we realised in mid-December that we would not be able to borrow what we expected to in January and February. What we had not anticipated was the severity of the financial crisis which started in mid-December, culminating in January and February; this meant Greece could not borrow on international markets. This was not the result of the actual size of the 2009 budget deficit. In fact, it had almost nothing to do with the budget deficit itself; it had to do with the sustainability of the debt overhang.

By early February 2010, you were telling journalists that Greece was heading toward the IMF, and Dominique Strauss Kahn said he was talking with George Papandreou even before the elections.

Certainly they were talking, but I am not sure they were necessarily talking about an IMF stand-by agreement for Greece. I don’t have any information on that. But in the government, and insofar as I was concerned, the fact that the financial situation was changing rapidly became apparent in mid-December, when Fitch and Moody’s lowered Greece’s rating. It was the first signal that the markets would attack the euro, using Greece as a vehicle for a speculative attack on the euro, using sovereign bonds. By January, the eurozone positively accepted our adjustment programme, spanning a period of four years. What changed abruptly is that the financial crisis shortened that period, and took the oxygen out of that adjustment programme.

Before Davos, which was in early February, it became evident that Greece could not borrow on international financial markets, and that spreads were rising fast. We were entering a very different phase. We had to, first of all, make sure we had the funding available to finance the economy since we could not enter the markets. It was exactly like the period that Italy faces now.  The first [wage and pension] cuts were announced by the Prime Minister on March 3. There were in fact two sets of measures, first February 9 and then March.

In retrospect, what might have been differently between October and March?

The part that was not implemented, and would have helped tremendously if it had, was reorganising the tax administration to combat tax evasion. We had worked on that issue prior to the elections, and we knew a complete overhaul was needed. That was postponed until 2011.


This is something you have to ask Mr Papaconstantinou. The point is that this postponement meant that the tax base did not expand earlier; had it done so, it would have made the adjustment later on easier.

New Democracy has charged that Pasok in two years hired over 20,000 people and established dozens of new state organisations. How do you explain that?

That is not true. This is all baloney. There was no hiring of 28,000. There was negative hiring. Minister Dimitris Reppas presented a detailed account of these numbers; there was extensive double counting in these estimates and inappropriate monitoring; for example, organisations that were split were counted twice. The problem is different. Some major reforms were either not pursued early enough or they could have been promoted much more ambitiously in 2011. One is dealing with tax evasion, which should have started in 2009.

Another is the overhaul of the public sector. We proceeded with horizontal measures, like firing temporary (stage) employees, 50,000 of them in 2010, or placing permanent public sector employees in a work-redundancy or pre-retirement status in 2011, instead of pursuing a major administrative reform that would make the public sector less costly and more effective. This is a top priority today. Similarly, if we had moved faster on cutting public expenditures – for example on pharmaceuticals, drugs etc or by  revamping social benefits – indirect taxes such as VAT rates could have remained lower.

You have known Lucas Papademos for many years. How would you describe him?

I know him very well, from both the US and from the University of Athens, where we were colleagues in the economics department.

He is a very serious man, a very composed, credible, and professional person.

A technocrat?

I would say he is someone who has dealt with economic policy all his life – more of a technocrat, yes. All his work has been on monetary policy. HE himself said he is not a politician.

What about the fact that he was Bank of Greece governor when statistics were allegedly altered to get Greece into the eurozone? Does the Bank of Greece governor not bear responsibility?

No. He has replied to this issue. It was not fiddling with the numbers. It was what you include in the numbers. There exist different ways of treating both military expenditures and the general government. Greece included in the numbers what other governments were doing at the time. The way these numbers were presented was in accordance with Eurostat rules and with its blessing at that time.

What will be the biggest obstacles to Papademos’ success?

Papademos and the government have a dual challenge. One is to complete negotiations with the European Union and fulfil that part of the package. I have no doubt that he will do what can be done on that. The other part of the challenge is to manage the internal political, economic and social scene. That is a very different ballgame.

This government needs to present to the Greek population a credible roadmap for what to expect from 2012-2014, to manage expectations and the limited capacity Greek families have to pay increased taxes, at a time when incomes are reduced. The bills are now coming, and many Greek families are unable to pay what they ought to. Unless this challenge is managed, there will be problems.

What do you think the new memorandum will look like?

The new memorandum will set out economic policy for 2012- 2014. It will probably be a combination of the medium term plan passed in July, including the provisions of the recent multi-bill voted last month, plus any extra measures that would be included in the budget to correct deviations from 2011-2012 targets.

What remains to be decided now between Greece and the EU in the new memorandum?

A series of decisions on debt management must be taken. First is the private sector involvement (PSI) in the debt write-down and the loan agreement, which has a lot of technical issues. One of the major issues is who will have jurisdiction – Greek or UK courts? – and other legal aspects of the agreement. The last I knew it was Greek courts, but it is open. Jurisdiction determines who is paid first in case of default.

The second thing is securing the sixth loan tranche, which is dependent on the first issue, as the IMF cannot lend unless future debt is sustainable. The IMF has to have assurances from the eurozone and the European Council, that the Greek debt is manageable. Third is the conclusion of the new memorandum providing a consistent framework for economic policy over 2012-2014.

‘There is no doubt that the political system as we knew it after 1974 is completely shaken. Now there certainly will be changes within parties and across parties’

What is open to possible renegotiation that can make life a bit easier for the middle class?

There are indeed many decisions regarding taxes and expenditures that could be adjusted over time. Adjustments can be made in the new memorandum to distribute the burden of adjustment differently than it has been until now. Indirect taxes, including VAT rates such as the 23 per cent VAT on restaurants, need to be lowered not only because they pose a high burden on middle and low-income families but also because they do not generate the returns expected; medical and pharmaceutical expenditures on the other hand can be cut further through continuous re-pricing and electronic prescriptions. Electronic governance, including monitoring and revamping social spending, can result in dramatic reductions in spending.

Is it possible to get rid of the “monster” property tax?

The property tax should stay, but the rate at which property is taxed must be revisited, to make corrections. Otherwise, it is one of the most progressive and objective taxes. But it needs to be fine-tuned to correct injustices and take into account social and economic conditions. A middle to low income family with unemployed members might have inherited two properties in the village but might be unable to pay the imputed tax.

We have reached the limit of taxation, especially of indirect taxation, for wage earners, pensioners and consumers. I think both Papademos and the Troika know that.

How will Papademos and Venizelos get along? Will there be conflict between two big egos?

Lucas Papademos is not a guy with a huge ego. He is very composed, very serious and low key. He projects security.

They will co-exist without problems.

How will they divide responsibility on economic policy?

The prime minister will have a major say on the overall framework for economic policy. The finance minister will implement it, as he supervises both tax authorities and the overall budget. Papademos will have oversight over the negotiations. The finance minister will need to supervise the technical and legal work that is needed.

What should the relationship be between Pasok and ND, the two parties leaders, and this government?

Given the unusual situation we are in, I think the Papademos government will probably supersede the two parties; I expect it to handle the negotiations with the eurozone and to have ample degrees of freedom in the negotiations.

Can ND play a constructive role, given its prior anti-memorandum stance?

This is a problem that ND needs to resolve. Things are interdependent, so it will be difficult for ND to separate in practice the loan agreement from the policy mix. ND could adapt in theory the mix of economic policy, but only over time. For the time being, since the new memorandum will be an amalgam of past agreements, the room for manoeuvring will be relatively limited. After elections, the policy mix could be changed periodically as we move along; it will be extremely difficult to renegotiate it in January or February.

Do you see future party breakups, since the memorandum is tearing apart the parties from within?

There is no doubt that the political system, as we knew it after 1974, is completely shaken. There certainly will be changes within parties and across parties. I don’t preclude reshuffling and new political formations. It all depends on political dynamics: whether it is possible in one or the other party to present a new synthesis of policies that might be acceptable to larger majorities. Yes, there might be breakdowns or restructuring of parties, but new leaderships might appear that could present an overall, encompassing agenda that brings different factions together.

How likely is a comeback of former premier Costas Simitis and the modernisation crowd, with a new party?

Pasok brought into its fold different ideological tendencies. As in the labor party in the UK, there has always been a centre-right and a centre left within Pasok. This was a source of strength. These were never organised currents. This fight will be waged once again in the months to come.

Isn’t the whole political system at risk of being defined by a simple dichotomy between pro and anti-memorandum forces?

This was the case in 2010, not in 2011.  At a Pasok meeting this year, I presented an agenda about why, given the memorandum, we need to look at what might be progressive politics within that context. The left unfortunately positioned itself against the memorandum, as did ND. We have to accept that the memorandum, which includes a very ambitious fiscal consolidation plan, will be with us for the next ten years. The issue for progressive politics is to see, within that straight jacket, what choices can bring a more equitable sharing of the burden, guaranteeing that there will be growth, employment and social cohesion on that path.

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